A Glossary of Microeconomics Terms
- Abundance--A physical or economic condition where the quantity available of a resource exceeds the quantity desired in the absence of a rationing system.
- Budget Set--Different bundles of goods and services that are attainable to the consumer at given market prices and the consumer's fixed level of income.
- Competition--The process of consumers bidding prices upwards or producers cutting prices in order to allow those agents to be involved in a market trade.
- Complementary Goods---A pair of goods where the quantity demanded of one increases when the price of a related good decreases.
- Complete Preferences--The ability of a consumer to fully identify his/her preference for any combination or bundle of goods and services.
- Constant Returns to Scale (CRS)--A long run production concept where a doubling of all factor inputs exactly doubles the amount of output.
- Consumer (household)--An economic agent that desires to purchase goods and services with the goal of maximizing the satisfaction from consumption of those goods and services.
- Consumer Optimum--Identification of an attainable bundle of goods that maximizes a consumer's level of satisfaction given his/her level of income and market prices.
- Consumer's Surplus--The difference between what a consumer is willing to pay for each unit of a commodity consumed and the price actually paid.
- Cross-Price Elasticity of Demand--A measure of sensitivity in the quantity demanded of one goods in reaction to changes in the price of a related good.
- Decreasing Returns to Scale (DRS)--A long run production concept where a doubling of all factor inputs results in less than double the amount of output.
- Demand--A relationship between market price and quantities of goods and services purchased in a given period of time.
Represents the behavior of buyers in the market place.
- Diminishing Marginal Productivity (DMP)--A short run production concept where increases in the variable factor of production lead to less and less additional output.
- Diminishing Marginal Utility (DMU)--An economic concept that refers to the notion that additional units consumed of a particular commodity provide less and less additional satisfaction relative to previous units consumed.
- Dominant Strategy--A game theoretic outcome where the choice of one player is the same independent of choices made by other players in the game.
- Economic Agent--A decision maker involved in any type of economic activity.
- Economics-- The study of how a given society
allocates scarce resources to meet the unlimited wants and need of its
- Edgeworth Box--An analytical tool used to study the behavior of two economic agents based on preferences for goods and services when production of those goods is held constant.
- Efficiency--A situation in the allocation of
resources where the benefits of consuming one more unit exactly equal
the (social and private) costs or producing that good.
- Equilibrium--A condition where there is no tendency for an economic variable to change.
- Expenditure--The amount spent by a consumer on a bundle of goods or services (the product of market price and quantity demanded).
- Factors of Production--An exhaustive list of inputs required for any type of production.
- Factor Prices--The payments made to the factors of production (rents, wages, interest, and profits).
- Final Goods and Services--Goods and services that are purchased for direct consumption.
- Fixed Costs of Production--Those costs of production that are independent of production levels in the short run.
- Flow Variable -- A variable that is measured per unit of time..
- Game Theory--A modeling technique that accounts for strategic behavior of economic agents reacting to the actions of others.
- Income Effect--A reaction of consumer's demand for goods or services due to changes in purchasing power holding relative prices constant (see Substitution Effect).
- Income Elasticity of Demand--A measure of sensitivity of quantity demanded to changes in consumer income.
- Income-Neutral Good--A good where quantity demanded is unchanged when consumer income changes.
- Increasing Returns to Scale (IRS)--A long run production concept where a doubling of all factor inputs more than doubles the amount of output.
- Indifference Curve--A set of points that represent different bundles of goods which provide the consumer with the same level of satisfaction (or utility).
- Inferior Good--A good where quantity demanded decreases when consumer income increases (there is an inverse relationship between quantity demanded and income).
- Intermediate Goods and Services-- Goods (or services) used to produce other goods (i.e., capital equipment).
- Lexicographic Preferences--Preferences that can be strictly ranked --usually applies in situations where only one good in a bundle is preferred by the consumer.
- Long Run Production-- Production activity where all factors of production may vary in quantity. The firm has the freedom to substitute among these factors or production in attempts to minimize costs.
- Marginal Rate of Substitution--The rate by which a consumer may substitute a quantity of one good for another holding his/her level of utility constant.
- Marginal Costs--The cost of producing one more
unit of a good in the short run. A measure of the opportunity costs
of the variable inputs in their next best use.
- Marginal Revenue--The revenue generated to a firm by selling one more unit of a good or service.
- Marginal Utility--The satisfaction a consumer receives by consuming one more unit of some good or service.
- Market--A place or institution where buyers and sellers come together and exchange factor inputs or final goods and services. A market is one particular type of economic rationing system.
- Monopolistic Competition--A market structure similar
to perfect competition in that there are a large number of firms
competing in a given industry. However, each firm is selling a differentiated
product and may exploit brand preferences such that is may act
as a monopolist with respect to its own customers.
- Monopoly--A market structure where only one firm exists in a given industry. This firm has a high degree of market power such that it is able to act as a price-maker with respect to market prices.
- Needs--Goods and services essential for human survival.
- Negotiation Space--A set of consumption bundles (points) relative to an initial or current endowment where one or all consumers can be made better off through trade without harming any other consumers.
- Normal Good--A good where quantity demanded increases when consumer income increases (a direct relationship between quantity demanded and income).
- Oligopoly--A market structure with only a few firms in a given industry.
- Opportunity Cost--The value of a resource applied to its next best use.
- Pareto Improvement--A situation in exchange where one consumer is made better off by a trade without harming the other consumer.
- Pareto Optimum--A situation where it is not possible to exchange goods or services without harming one of the agents involved.
- Perfect Competition--A market structure where many firms exist, each with a small percentage of market share selling a homogeneous product. These firms are all price-takers with no influence on market price.
- Price Elastic Demand--When the percentage change
in quantity demanded exceeds the percentage change in market price.
- Price Elasticity of Demand--A measure of sensitivity of quantity demanded to changes in market price.
- Price Inelastic Demand--When the percentage change in quantity demanded is less than the percentage change in market price.
- Unitary-elastic Demand--When the percentage change in quantity demanded is exactly equal to the percentage change in market price.
- Producer (business firm)--An economic agent that converts inputs (factors of production) into output (goods and services) with the goal of maximizing profits from production and sale of those goods and services.
- Producer Optimum--A choice of input combinations or output levels that maximize the profits of a producer taking all prices as a given.
- Producer's Surplus--The difference between revenue received and the variable costs of production for each unit of a commodity sold. Represents a contribution to fixed costs and producer profits.
- Production Function--A technical relationship between a certain level of factor inputs and the corresponding level of output.
- Production Possibilities Frontier--A relationship
between two types of output defining the tradeoff that exists in allocating
resources from production of one good to the other.
- Profits--The difference between sales revenue and the costs of production.
- Rationing Systems--A process used to match the desire for goods and services with their availability.
- Relative Prices--A ratio of any two prices or one particular price compared to a price index.
- Resources--The raw materials and other factors of production that enter the production process or final goods and services that are desired by economic agents.
- Revenue The amount received by a producer from the sale
of goods and services (the product of market price and quantity sold).
- Risk-- A measure of uncertainty about the value of an asset or the benefits of some economic activity.
- Satiation--A level of consumption where the consumer is fully satisfied in a given period of time.
- Scarcity--A physical or economic condition where
the quantity desired of a good or service exceeds the availability of
that good or service in the absence of a rationing system.
- Shortage--A market condition where the quantity demanded of a particular good or service exceed the quantity available.
- Short Run Production--Production activity where only one factor of production may vary in quantity. All other factors of production are fixed in quantity. Substitution among factors is not possible.
- Speculation-- The purchase of a good or asset not intended for final consumption but rather in the expectation of future sale at some higher price.
- Stock Variable-- A variable measured at point in time.
- Substitution Effect--The reaction of a consumer's demand for goods based on changes in relative prices holding purchasing power (or utility) constant (see Income Effect).
- Substitute Goods--A pair of goods where the quantity demanded of one increases when the price of a related good also increases.
- Supply--A relationship between market price and quantities of goods and services made available for sale in a given period of time.
- Surplus-- A market condition where the quantity supplied of a particular commodity exceeds the quantity demanded
- Total Effect--The observed change in quantity demanded due to a price change of one particular good.
- Transitive Preferences--A logical pattern of preferences where preference of one good over a second good and preference of the second good over a third good imply preference for the first good compared to the third good.
- Unrelated Goods--A pair of goods where the quantity demand of one is unaffected by changes in the price of the other.
- Utility--A measure of the satisfaction received from some type of economic activity (i.e., consumption of goods and services or the sale of factor services).
- Variable Costs of Production--Production costs related to changing quantities of a variable factor of production in the short run.
- Wants--Preferences for goods and services over and above human needs.
© 1999-2004, Douglas A. Ruby